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IBM Strategic Imperatives mark a transition into software and services

IBM's Strategic Imperatives are slowly morphing the server hardware stalwart into a software and services company. But IBM still needs hardware to complete the transformation.

IBM's transition from a dominant server hardware supplier to one focused on -age software and services has been what you might expect from a 100-year old company: glacially slow and sometimes painful.

But lately the 100-year-old seems to have a bit more spring in its step.

Several years ago, IBM launched its Strategic Imperatives initiative, a mission to drive revenues in emerging markets, including cloud, analytics, mobile, social and security services, to hedge against rapidly falling sales of its legacy server hardware.

Over much of that time, IBM Strategic Imperatives revenues have grown double digits and now represent over 43% of IBM's overall sales over the past 12 months. The company's cloud revenues reached $15.1 billion over the past 12 months and as-a-service revenues from the Strategic Imperatives rose to $8.8 billion.

IBM's transition to a more meaningful cloud strategy has been circuitous. The company had a somewhat aimless focus on cloud strategy until it purchased the Dallas-based SoftLayer Technologies, Inc. in 2013 for $2.5 billion. SoftLayer, then the largest privately held infrastructure provider, would hook its public cloud services with IBM's SmartCloud offerings so users could more quickly and easily incorporate cloud computing.

While SoftLayer provided IBM with a platform to deliver its SaaS-based products both in the U.S. and overseas, that platform was actually better suited for hosting than delivering cloud services, said Lydia Leong, an analyst with Gartner.

"SoftLayer has been both successful and unsuccessful for IBM," she said. "SoftLayer was not a significant cloud provider, but more a hosting provider from the old-school competing with vendors like Internap and Peer 1."

IBM has done little to enhance SoftLayer over the past three-plus years, with the exception of some minor improvements to its ability to handle storage back in early 2015, according to Leong. It has hardly kept pace with the hundreds of upgrades competitors, including Microsoft and Amazon Web Services (AWS), have made to their cloud platforms the past three years, Leong said.

Over the past couple of years, however, IBM has pieced together a new cloud architecture made up of state-of-the-art hardware and software technologies. The goal of the project, codenamed Genesis, is to accelerate delivery of modern web services and products with what the company calls next-generation infrastructure (NGI).

"The NGI product is intended to bring IBM into the modern world of infrastructure," Leong said. "It has a hardware design that looks similar to the designs used in AWS or Azure that can then deliver services that look more modern."

The end result of the NGI project will be a fabric computer, which will incorporate technologies such as 3D Torus, a new method of interconnecting multiple servers, and Single Large Expensive Disk. Together, those will reduce latency to less than 20 milliseconds, according to sources briefed by IBM. The company hopes this speed of web services will provide the edge it needs to compete against Amazon.

This collection of technologies will not be sold in commercial servers for IT shops; they will only reside in servers inside IBM's 56 data centers, specifically for IBM cloud customers.

Winnowing down the hardware portfolio

While the IBM Strategic Imperatives initiative has held up its end of the bargain, IBM's legacy hardware has not. Sales of the company's core server hardware, especially its Power series proprietary server, have taken a severe beating. For every step forward with Strategic Imperative products, server hardware takes two steps back.

IBM's transition away from server hardware dependence started with the sale of its Intel-based System x server line to Lenovo in early 2014 for $2.3 billion. That business was profitable at the time of the sale but didn't fit with IBM's longer-term focus on higher-margin products, such as its proprietary Power servers and z Systems mainframes.

The company dumped more unprofitable hardware investments when it sold off its chip manufacturing facilities to GlobalFoundries, also in 2014. IBM was so eager to get the chip plant off its balance sheet that it actually paid GlobalFoundries $1.5 billion to take it off its hands.

The decision to sell off the System x line proved to be ill-timed, however. Soon after, sales of the Power series began to rapidly decline, losing to a host of competitors selling much less expensive, and steadily more powerful, Intel-based servers.

While the Power series has taken a beating, sales of the beleaguered servers appear to have bottomed out over the past several fiscal quarters. Some analysts say that growing acceptance of the IBM Strategic Imperatives software will correspondingly boost the fortunes of the Power series.

Another development that could boost IBM Power sales would be the success of OEMs licensed to resell the product.

"Products from the OpenPower Foundation are now just starting to come to market," said Charles King, president and principal analyst with Pund-IT, Inc. "If we see the level of adoption [OpenPower] partners believe they will get, we could see incremental revenues generated as a result."

While IBM's mainframe line has slowed its decline over the past three or four years, revenues are still only half where they used to be, at about $2 billion a year versus $3 billion to $4 billion, according to Bernstein Research. But the release of its z14 Systems mainframe this month should boost mainframe sales in 2018.

Software will always need to run on something. I don't imagine IBM will ever get out of the hardware business entirely.
Charles KingPresident and principal analyst, Pund-IT, Inc.

Ironically, the very hardware on which IBM is trying to lessen its dependence will further spur sales of products that are part of the Strategic Imperatives.

"IBM [will frame] its Strategic Imperatives push with the delivery of the z14 and then later this year the Power9-based servers," said Geoffrey Woollacott, principal analyst with Technology Business Research, Inc. in Hampton, N.H. "The success of the Strategic Imperatives could make those hardware platforms increasingly more relevant to businesses."

So, even before the Strategic Imperatives initiative completes its mission, IBM's next transition -- a refocusing on its hardware technologies -- is on the horizon.

"Software will always need to run on something," King said. "I don't imagine IBM will ever get out of the hardware business entirely."

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